In today’s context of scarce and expensive traditional energy sources, renewables are once again becoming a more and more popular alternative worldwide. China’s specific situation is nowadays especially important for several reasons, including:

- The sheer size of the country its population, which in 2007 accounted for 16.8 per cent of the worldwide consumption of primary energy (only surpassed by the United States);

- Its economic growth and resulting increase in energy needs (10 per cent per year since 2000), both for producing goods and to meet improving living standards;

- The environmental impact of traditional energy sources (China depends on coal for 69 per cent of its energy) and the uncomfortable position of being one of the world’s two largest emitters of CO2;

- Its geological features, in which the existing reserves of oil, natural gas and coal might be completely used in 15, 30 and 80 years respectively;

- China wanting to be, as much as possible, self-sufficient energy wise (and, hence, the ongoing acquisition of foreign energy assets, in Africa, Asia and even Europe).

- The increased use of renewable energy sources would address all these issues, at least partially. However, by then end of 2006, renewables accounted for just 7 per cent of China’s total primary energy consumption.

Government Guidance

The Chinese Government has been stepping up its efforts in fostering the development of alternative energies. This becomes clear if we look at four key documents:

- The Renewable Energies Law, issued in February 2005 (“Law”), that establishes the general guidelines for the industry in areas such as pricing, cost sharing and financing, among others;

- The Medium and Long-Term Development Plan for Renewable Energy in China, published in September 2007 (“Plan”), stating that by 2020, 15 per cent of all energy should come from renewable sources, with a 30 per cent share by 2050. By 2020, according to the Plan, 300 GW of hydro capacity, 30 GW of wind, 30 GW of biomass and 1.8 GW of solar energy should be installed;

- The Catalogue for the Guidance of Foreign Investment Industries, amended in October 2007 (“Catalogue”), which places the “construction and management of new energy power plants (solar energy, wind energy, magnetic energy, geothermal energy, tide energy and biological mass energy, etc.)” in the Encouraged Industries category;

- The White Paper: China's Policies and Actions on Climate Change, released in October 2008, that places an emphasis on energy conservation and optimisation of the energy mix, namely by reducing the role of coal as the primary energy source.

The Specific Case Of Wind Power

According to data from the European Wind Energy Association, China was the fifth-largest wind energy producer worldwide at the end of 2007. With an installed capacity of 6GW (3.5GW installed during 2007 alone), it still trails Germany (22.2GW) and Spain (16.8GW) by a large margin.

While these figures show that there is still a reasonably wide gap between the 6GW of installed capacity and the 30GW objective for 2020, the truth is that at this rate, the Government’s goals seem very conservative. Greenpeace has stated that by 2020 China will have 50-100GW of installed capacity, while China’s National Development and Reform Commission (NDRC) has been quoted as admitting that 120GW is a more likely scenario by 2020. Considering the official surveys that estimate a 1000GW feasible wind power capacity, this seems well within reach.

A couple of areas have been subject to most attention and investment: the first one is in the North-Northwest, especially in Inner Mongolia and Xinjiang; the second area is along China’s coastline, from Shandong all the way around to Guangxi. Additionally, offshore wind resources, although less explored, offer the greatest promise.

However, two very significant barriers have stood in the way of foreign investment in such a high potential industry: 1) the bidding system used to award major projects. Chinese companies tend to win the largest, centrally awarded projects by proposing to sell electricity to the grid at very low prices. These companies are apparently not so concerned with making money from renewables as they are with having a certain percentage of alternative energies in their energy portfolio, in order to meet Government demands; and 2) in a country where the market has little say in energy prices (the most notable cases being the low gas prices that have lead the government to compensate oil majors) it has been difficult for western companies to devise a profitable operation under these constraints.

Despite these barriers, foreign companies have been investing in two areas in the industry in China:

- Wind Turbine Manufacturers. The two largest companies worldwide are already manufacturing in China. The Danish company Vestas, with a 23 per cent global market share, has been producing in China since 2005, with several factories in Tianjin. The Spanish group Gamesa, with a 15 per cent global market share, has invested EUR40m to achieve a 700MW yearly turbine production capacity, also in Tianjin – and China is already responsible for 15 per cent of worldwide sales. Other large players, such as GE, Suzlon and Nordex, are also manufacturing locally.

- Wind Energy Producers. Australian company Roaring 40s is currently involved in seven wind farms (under construction and operating), in Shandong and Jilin provinces. It operates under a very specific JV model with a Chinese SOE partner (three projects with one company, four projects with another), looking for smaller projects (50MW) and negotiating directly with local authorities, therefore avoiding the larger, centrally awarded projects where large Chinese companies control their turf. Recently, it has signed an agreement with Datang Jilin Power Generation, a large traditional energy producing SOE, to develop a 1000MW wind farm. Construction will begin in 2008, and will be one of the largest projects in the world.

Another company involved in seven projects, all in Inner Mongolia, is Honiton Energy Holdings, which also operates in 50MW incremental projects but for larger wind farms. The company is based in China but has foreign investors and was recently acquired by a Dubai Investment Bank and a Singapore operator, in a USD2 bn deal. Unlike Roaring 40s, Honiton approaches each project alone, without JVs with Chinese companies. An interesting landmark achieved, according to the company, was the signing of the first Power Purchasing Agreement by a foreign firm – 25 years in duration, the first 35,000 hours will be sold at RMB0.548kw/h and subsequently at existing market prices.
 
Barriers Are Real, But Investment Opportunities Exist

There are still important obstacles in the way of foreign investment with some large infrastructure/energy focused funds finding it nearly impossible to enter the market. Private equity funds have confirmed that they have been looking at some renewable energy projects, but could not make the numbers work, at least for energy production. In equipment manufacturing, the outlook seems brighter.

However, the cases presented above prove that China is currently a real market in renewables – both for power generation as well as for manufacturing equipment.  Like in most sectors in the country, it’s essential to be ingenious, flexible and persistent to overcome existing obstacles.

Capital Eight is an investment bank headquartered in Shanghai, specialized in M&A, project-structured finance and public/private fund raisings.




 

Keywords : Renewables, Energy, Wind, Water, Environment

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